Question

1A.) Assume a simple economy where only burgers are traded. In a year, 100 burgers are traded at the rate of $5 per burger. Assume two scenarios:

a. The economy has $100 in the form of 20 pieces of $5 bills.

b. The economy has $100 in the form of 100 pieces of $1 bills.

Calculate the velocity of money for both situations.

1B.) For a country A, the GDP growth rate is 8 percent and inflation is 4 percent. If the velocity of money remains constant, what is the change in real money balances?

Answer 1

a. 5

b. 5

1B. 8%

Step-by-step explanation:

a. MV = PY

Money Supply * Velocity of money = Price level * Real GDP

100 * V = 5 * 100

100V = 500

V = 5

b. Velocity = 5

It will not change because the money supply for both questions is the same = $100.

1.B. Change in real money balances = 8%

The change in real money balances will be the same as the GDP growth rate if velocity is constant.